The treasury has made some far-reaching concessions regarding its tax proposals for venture capital companies.
The industry expressed strong opposition to the proposals contained in the draft Taxation Laws Amendment Bill, saying that it would kill off the use of the tax incentive provided in the Income Tax Act for venture capital investments.
The proposals were intended to address perceived abuse of the tax incentive. They would have required that the venture capital company and the company in which it invests (the qualifying company) have only one class of shares and that this apply retrospectively from the year of assessment during which the company started trading and any time after that.
Another proposal was that trading between the investor in the venture capital company and the qualifying company be prohibited.
Treasury chief director Yanga Mputa told parliament’s finance committee on Wednesday that the treasury had accepted or partially accepted the industry’s comments on the proposals.
With regard to the class of shares, Mputa said changes would be made to the bill so that no shareholder or connected person in a venture capital company may hold directly or indirectly more than 20% of the shares of any class in the venture capital company. The test regarding the class of shares would be applied after a period of 36 months from the date that those classes of shares were first issued by the venture capital company.
The retrospective nature of the application of the new rules would be removed, Mputa said. They would apply to any trading that commences or classes of shares issued during the years of assessment commencing on or after March 1 2019.
Dealing with the prohibition of trading between an investor in the venture capital company and the qualifying company, Mputa said that "to limit the impact of the proposed 2018 amendments on legitimate transactions and target the mischief in question, it is proposed that changes be made in the 2018 draft Taxation Laws Amendment Bill so that the amount received or accrued by the qualifying company from any transactions between a venture capital company shareholder be limited to less than 50% of the aggregate amount received or accrued from the carrying of a trade.
"In addition, it is proposed that this limitation only be applied after a period of 36 months from the date that the venture capital company acquires an interest in a qualifying company. The 36-month waiting period is proposed specifically to assist enterprise supply chain development."